The European Central Bank dropped a heavy hint that it is going to wait till early next year before deciding whether to finally follow the Federal Reserve in buying government bonds to depress interest rates and stimulate the economy.
Such ‘quantitative easing’ has been taboo all through the years of crisis that the Eurozone endured since 2008, due largely to German concerns that it would encourage governments to run big deficits and provoke runaway inflation.
However, the greater fear in the Eurozone these days is over the risk of deflation taking hold. A deflationary spiral would quickly make it impossible for countries such as Italy and Greece to service their massive debt burdens. Some in financial markets had already bet on the E.C.B. taking the plunge with ‘Sovereign QE’ already at its meeting on Dec. 4.
In a speech in London, E.C.B. vice-president Vitor Manuel Constancio said the Frankfurt-based bank still expects the measures it announced earlier in the fall–an interest rate cut, ultra-cheap long-term loans to banks and the purchase of some private-sector bonds–to help the economy revive after two straight quarters of near-zero growth.
With the asset purchases, the E.C.B. is trying to expand its balance sheet back to the levels it was at around the height of the Eurozone debt crisis in early 2012.
“We have, of course, to closely monitor if the pace of its evolution is in line with that expectation,” Constancio said. “In particular, during the first quarter of next year we will be able to gauge better if that is the case. If not, we will have to consider buying other assets, including sovereign bonds in the secondary market.”
Constancio’s comments came as Europe’s economic apparatchiks in Brussels unveiled their latest grand plan to create jobs and growth in the E.U. again, by providing 21 billion euros ($26 billion) in guarantees for new loans to fund infrastructure investments and loans to small and medium-sized businesses.
The guarantees mainly from the E.U.’s own modest central budget would allow the European Investment Bank to partner with private-sector investors in long-term investments such as broadband networks and new energy grids. In theory, institutional investors such as Europe’s big insurers should be attracted to the scheme, as they seek higher-yielding alternatives to bonds that are paying record low rates (the E.C.B.’s bond buys will only depress yields further).
However, analysts are skeptical that the plan will deliver anything like the benefits being promised. Carsten Brzeski, an economist with ING-Diba in Frankfurt, said in a blog post that such ideas are doomed to fail due to the Commission’s lack of its own resources and the difficulty of getting member states to agree on providing money themselves–especially against the backdrop of long-running disputes over budget deficits and austerity.